Class I Milk
Policy background on the initial 2018 change and an analysis of early 2020 revenue impacts of the change was discussed previously here: Impact of the Farm Bill Change to the Class I Milk Price on Dairy Farm Income. Other analyses on the financial impacts of milk and dairy commodity price volatility on producer price differentials, de-pooling and the ineffectiveness of dairy risk management tools to offset negative PPDs can be viewed in the following: De-Pooling and Record-Large Negative PPDs Continue Into July, Negative PPDs to Offset Milk Price Rally, Revisiting Record-Large Negative PPDs on Milk Checks and Lack of DMC Payments Does Not Reflect Dairy Farmers’ Difficulties.
Understanding the structure of the current Class I pricing formula is essential to compare alternatives. Figure I displays a diagram of the current calculation which, again, is the simple average of advanced Class III (cheese) and Class IV (milk powders) skim milk prices plus 74 cents. Any large disparity between the Class III skim milk price (SMP) and Class IV SMP is smoothed through the averaging feature, meaning the final Class I base calculation will not fully reflect the higher (or lower) option. The 74 cents was originally calculated using the historical difference between the Class III and IV skim prices to make dairy farmers and milk prices indifferent to the change over the long term. The Class I location-based differential is included in our diagrams to reflect a final adjustment made for regional supply and demand differences, which currently range from $1.60 per hundredweight to $6.00 per hundredweight.